Selecting Emerging Sectors Based on Volumes

Published on: August 21, 2024

In trading and investing, identifying emerging sectors early can provide a significant advantage. One of the most effective tools for uncovering these opportunities is the analysis of trading volumes.

By understanding how volumes interact with price movements, market participants can gain insights into the strength and sustainability of a sector’s trend.

This article delves into the role of volumes in technical analysis, the importance of tracking sectoral volumes, and how to leverage tools like Definedge’s Sector Volume scanner in RZone to make informed decisions.

Understanding Volumes in Technical Analysis

Volumes represent the total number of shares or contracts traded within a specified period, typically a day.

In technical analysis, volumes serve as a powerful indicator of market sentiment. They reveal the intensity behind price movements, helping traders distinguish between mere price fluctuations and genuine trends.

When the price of a stock or sector moves in tandem with high volumes, it signals strong conviction among market participants. Conversely, price movements on low volumes may indicate a lack of enthusiasm or participation, often resulting in weak or unsustainable trends.

The Significance of Sectoral Volumes

Individual stock-level volumes provide insights into that specific stock’s momentum. However, when these volumes are aggregated across the stocks within a sector, they offer a broader view of the sector’s overall activity. Tracking sectoral volumes helps identify which sectors are gaining traction and which are losing momentum.

Rising sectoral volumes indicate an emerging trend within the sector, suggesting that market participants are increasingly interested in the stocks within that sector. On the other hand, declining volumes signal diminishing interest, which could be a warning sign to avoid the sector.

Identifying Bullish Momentum through Average Volumes

A key aspect of volume analysis is comparing current volumes to historical averages. Simply observing volumes on a single day can be misleading due to market noise or one-off events. Instead, analysing 10-day and 20-day average volumes provides a clearer picture of the trend.

10-Day Average Volume: This shorter-term average captures more recent trading activity, helping to identify sectors that are gaining momentum quickly.

20-Day Average Volume: This longer-term average smoothens out daily fluctuations, providing a more stable view of sectoral activity.

When volumes rise above these averages, it indicates growing interest and potential bullish momentum. Consistently high volumes, when coupled with price increases, can signal a strong and sustainable uptrend.

Leveraging Definedge’s Sector Volume Scanner in RZone

Definedge’s Sector Volume scanner, available in the RZone platform, is an invaluable tool for tracking sectoral volumes and precisely identifying emerging sectors. Here’s how you can use it effectively:

1. Exploring Sector Groups

The Sector Volume scanner provides various group options to suit your analysis needs:

All Sectors: This group includes all predefined groups by NSE and Definedge as well as any custom groups you have created.

NSE Sectors: Focuses on sectors as defined by the National Stock Exchange (NSE).

Definedge Sectors: These sectors are curated and maintained by the Definedge team, offering a specialised view.

NSE Segment: This group consists of major NSE indices, allowing you to track broader market movements.

Note: You can select and deselect groups by clicking on “Select Group”

2. Volume vs. Delivery Volume

The scanner allows you to choose between analysing total trading volume or delivery volume.

Delivery volume refers to the shares delivered after a transaction instead of those traded intraday and squared off. High delivery volumes often suggest genuine buying interest, unlike speculative trading.

Interpreting the Output

The scanner’s output provides a wealth of information at a glance:

Average Volume: Displays the total volume of transactions in the sector during the current session.

Percentage Change: Shows the percentage increase or decrease in total volume compared to the previous session, highlighting any significant shifts in activity.

10-Day and 20-Day Averages: These columns display the sector’s average volume over the past 10 and 20 days, respectively, along with the percentage change. A higher percentage change indicates significant activity, often accompanied by meaningful price action.

You can also export the data in CSV format, making it easy to analyse trends over time or integrate the data into your custom trading systems.